I have just sold a business that has been trading for over two hundred years. And what was it that persuaded the partners to sell after six generations? The recession? The rise of the internet agents? No, it was red tape. They have just paid a fine for a technical breach of a recently introduced regulation and for them, this was the straw that broke the camel’s back. I fear that they will not be the last company to find themselves in this situation.

Why?

The number of reasons that a letting agent can be fined has become ridiculous and the number of possible offences seems to grow almost every week. Some regulations are, of course, necessary. No-one will want to go back to the days when tenants died of carbon monoxide poisoning because their landlord had failed to service the boiler but so many other regulations that were originally brought in to deal with a legitimate problem have now mushroomed out of control whilst other areas where there are genuine problems remain unregulated.

Let’s take the problem of tenant deposits as an example. The regulations were introduced because unscrupulous landlords were confiscating tenants’ deposits without justification. This caused many tenants considerable financial hardship.

However, the pendulum has now swung so far the other way that it seems to have become almost impossible for a landlord to win a deposit dispute. The cost of complying with the legislation has also become disproportionate. In order to stand any chance of retaining the deposit, a landlord now needs a photographic inventory correctly signed on every page, regular periodic inspections and a photographic record of the check-out. The cost of this exceeds £250 per year for even a modest property.

The legislation to protect tenant deposits has been with us for some time and most well-run letting agents now have appropriate compliance systems in place but elsewhere, the never ending blizzard of new regulations has left many small letting agents struggling to keep up. Recent changes in legislation mean that agents now need to carry out money laundering checks on both their landlords and their tenants, need to check the immigration status of their tenants and need to re-issue the prescribed information at the end of each period of tenancy even if they are not managing the property.

The last requirement is particularly onerous and has already resulted in substantial fines for several letting agents. As a consequence of the Superstrike case, letting agents should re-issue the prescribed information at the end of the tenancy even if the tenancy goes periodic. Failure to comply can trigger a fine of three times the deposit held.

Impact

I could go on but this article is not intended to be a rant against red tape and regulations. The more serious consideration is what impact this blizzard of regulations will have on the industry. For the larger firms, it is an expense and an inconvenience. However, they have well qualified compliance departments who can design systems and procedures to ensure that they respond to all new legislation immediately. But the smaller agents do not have the resources to do this and many are breaking the law every day not because they want to but because they are simply unaware that they are doing so.

Larger agencies have compliance departments but many small firms cannot keep up.”

Inevitably, there will be more prosecutions and fines, some of which will be wholly disproportionate to the offences that were committed. One by one, the smaller agents will sell up or close down. Some will not be missed. The residential sales agents who entered lettings in 2008 without any training or preparation have for some time been a liability to both themselves and their clients. The sooner they are gone, the better. However, many of the specialist ownermanaged letting agents have offered their landlords an excellent service at a fair price for many years and it would be a great shame if there were to go. A similar thing happened to independent fishmongers during the 1990s. A whole raft of new regulations came into force that were so onerous and so expensive to comply with that most fishmongers closed down. Now it is hard to buy fish from anywhere except the supermarket. It would be a tremendous shame if the same thing happened to the letting industry.

A solution?

To my mind, the most positive way forward might be for the independents to join together into a number of networks that can manage the compliance burden for them in a cost effective way. This is what happened in the mortgage broking industry but unless the networks are set up soon, it will be too late.

Adam Walker is a management consultant and business transfer agent who has specialised in the property sector for 25 years.
www.adamjwalker.co.uk